Tien Tzuo On Sony, Subscriptions & 5 Predictions for the Future of Gaming

By Tien Tzuo • February 12, 2015

Sony is getting great reviews for the new Playstation Now platform, but they’re in good company when it comes to streaming game subscriptions:

EA launched a popular Xbox One subscription program featuring a half-dozen of their popular games for $5 a month called EA Access in April, 2014.

Xbox Live Games with Gold offers members access to advanced multi-player games, free demos and exclusive discounts for an annual fee.

Valve’s hugely popular online gaming platform Steam has supported subscriptions since April 2013.

And on the development side, Epic recently shifted their suite of Unreal Engine game design tools to the subscription model, much like Adobe’s Creative Suite.

The $70 billion dollar video game industry may be bigger than Hollywood, but it follows the same media consumption trends. Retail disc revenue is plummeting, while online revenue, including digital delivery and subscriptions, is on the ascent. Just take a look at GameStop’s stock price:

Not to pick on GameStop, but this news isn’t surprising. As media consumers, we’ve been conditioned by Netflix and Spotify to expect instant access to everything. Starbucks still sells CDs to the occasional baby boomer, but for everyone else (and millennials in particular) on-demand media consumption is the accepted norm.

Market analyst Nick Parker has an interesting chart tracing the ascent of cloud-based games and the flat-lining of shrink-wrapped product revenue:

The appeal of streaming subscriptions to gamers is obvious. For twenty dollars a month, Playstation Now subscribers get unlimited streaming access to over 100 older PS3 games, with many more to come. They can explore offbeat indie games without getting nickel-and-dimed (or app-stored) to death. And they won’t feel burned after dropping lots of money on a dud game.

Sony, in turn, benefits from a stable revenue model that’s less reliant on the ups and downs of blockbuster games and Hollywood economics. They’ll start every quarter with a platform of recurring revenue to invest as they see fit.

“With the subscription model, you have that constant flow of revenue. As game developers, creators of games, we want to be able to continue providing the best gameplay experience and sustain that. Of course, the initial subscriber numbers might not be as many as the free-to-play model, but we have that constant stream. We’re not thinking just about the business of the moment. We want to think about the long term and being able to have the funding to continue making updates. Some people might be focused on quickly gaining revenue, but you have to think about the long term.”

The video game industry also parallels Hollywood in production. Each game brand is a “franchise” equivalent to a movie studio, and currently their revenues are massively front-loaded in boom-or-bust release weekends. They have their own budgets, and reap their own benefits, in much the way you’d rather produce Titanic than Gigli, you’d rather release Call of Duty (from my office neighbors Sledgehammer Games) than Transformers: Rise of the Dark Spark.

And like entertainment studios, game developers like Activision, Blizzard and Take-Two Interactive are starting to see the benefits of bundling and joint packaging. With a subscription offering that crosses multiple brands, they can expose gamers to more titles, cross-market and expand their player interaction.

These companies are heavily focused on the player – on letting the player relationship sit at the core of their organization philosophy to maintain usage and loyalty. That said, they are still very product-focused.

Right now it’s every brand for itself. But I believe that turning this approach on its head, and delivering the consumer a variety of games based on learned data and behavior, is the real path to scale.

That being said, here are five predictions for the future of video games:

1. As more game studios move to subscription models, they will move away from annual releases of your favorite titles to incremental releases, much the way software companies moved from a major release/upgrade strategy to the monthly/quarterly releases of the SaaS model.

2. Game studios will also become less reliant on their console and mobile device partners, moving to an any-channel delivery method for their games. It will be a gradual process as contractual obligations wane and home internet bandwidth increases.

3. Monetization strategies will become even more granular with the increase in gamer data available to the studios. Although microtransactions are common with a slice of the game market (particularly mobile games and online virtual worlds), the rapid release of new versions based on real usage data will expand that reach. Custom map packs, new accessories/weapons, even adjusting story-lines. Gamers will choose their own adventure.

4. Game console domination of the game delivery market will recede as cloud options become more viable. Cloud server clusters, in combination with increased bandwidth, will eventually eclipse the processing power of console boxes.

5. Finally, if Netflix is the new norm in terms of content consumption, it also offers a great model for data-driven content creation. Game studios will start rolling out new titles based on the real-time gaming behavior of their subscription base.